Pensions Have Strong Retention Effect

Spring 2010 — A letter to the editor by NIRS submitted to Education Next disputes a recent piece entitled “Golden Handcuffs”

Shortcomings in the authors’ analysis lead them to spurious conclusions.

First, despite the authors’ claim, legally and otherwise, pension plans cannot and do not redistribute wealth.

Second, the authors incorrectly assert that there is no justification for the incentives embedded in teacher pensions. To the contrary, one of the most pressing issues facing schools is keeping top talent, especially in hard-to-staff areas. In light of this, retention incentives (which the authors refer to as “mobility penalties”) make perfect sense.

Economic research stretching back more than two decades has documented the strong retention effects embedded in traditional defined benefit (DB) plans, where benefits are based on an employee’s final pay. Authors Costrell and Podgursky describe the well-recognized pattern of benefit accruals in such plans and then jump to the conclusion that it serves no purpose. But, as economists have long known, it is precisely because of this pattern, which offers greater rewards for loyal employees who provide long service to an employer, that many employers offer DB pensions. Because turnover is costly (both in dollar terms and in terms of productivity), it makes sense for employers to build incentives into compensation that reward long service.

Indeed, until only recently, the vast majority of Fortune 500 companies relied heavily on DB pensions to retain top talent. Even as some private-sector employers have moved away from these plans in recent years, they have been careful to develop other compensation structures that mimic the incentives provided by DB pensions. Deferred compensation in the form of stock options or restricted stock awards is similar to pensions in that it encourages loyalty to an employer.

The problem is that school districts and government entities cannot offer stock options, restricted stock, or similar benefits. Thus, jettisoning DB pensions, as the authors recommend, can be expected to cause increased turnover and attrition of our most-effective teachers, hurting productivity and quality, in other words, exactly the wrong solution for our schools.